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Nectar Lifesciences: May bear fruit later - Outside View by Luke Verghese

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Nectar Lifesciences: May bear fruit later
Jan 22, 2013

For a 17 year old company, it has been able to ramp up sales in double quick time.

A manufacturer of bulk drugs and generics

This is an oddly named company. Nectar in reality is a sugar rich liquid produced by plants which attracts insects and makes pollination possible. Nectar Lifesciences is actually in the business of making and marketing of pharmaceuticals - bulk drugs, phytochemicals (plant based chemicals) and, generics, formulations, diagnostics and EHGC (extra hard gelatine capsules). It also dabbles in traded pharma sales - but its contribution to the top-line is a mere 6% of overall revenues down from 8% previously. In the latest accounting year the company generated revenues (net of excise) from operations of Rs 13 bn and also ponied up other income including operating income of Rs 227 m. The total income for the year was higher by 23.3% over that of the preceding year. The way the manufactured product revenues are divided up, it exported fully half of what it produced and sold in the latter year. That is to say exports accounted for Rs 6.5 bn and domestic sales another Rs 6.8 bn.

It also indulges in traded sales but here it is lopsided - exports bringing in Rs 87 m and domestic sales the balance Rs 674 m. The situation was however markedly different in the preceding year. In the case of manufactured sales - exports sales accounted for only one third of the revenues, while domestic sales accounted for the balance two thirds. In trading sales too there was a reversal in roles. Export revenues accounted for a much larger slice of this sub-revenue pie. It may be pertinent to mention here that inspite of the greater emphasis on exports in the latter year the company was barely foreign exchange positive what with export earnings of Rs 6.5 bn and forex outgo of Rs 5.3 bn. (However this outgo was to a large extent also occasioned by the repayment of capital on account of redemption of the foreign currency convertible bonds ).

Renewed emphasis on exports

Whether because of the renewed emphasis on exports or inspite of this factor the company registered a sharp fall in the pre-tax profit during the year. The profit before tax fell 29% to Rs 854 m. After the tax outlay of Rs 122 m the post tax profit fell by a similar margin to Rs 732 m. Thanks to the miniscule capital base of Rs 224 m relative to the scale of its operations, it registered an EPS of Rs 3.27 on a face value per share of Re 1. A pittance of a dividend of 10% was paid out, the same as previously. If one looks at the cash flow statement, even this lilliput payout was a difficult act to put through.

This Mohali, Punjab based undertaking came into being some 17 years ago and it makes do with five manufacturing plants located in the three states of Punjab, Himachal, and Jammu and Kashmir. The board of directors is chaired by Mr Sanjiv Goyal, the chief promoter of the entity. Together with his wife Raman, the two promoters control 44.3% of the total outstanding voting stock of the company. On the redemption of the GDR issue, the company issued an additional 46 m shares. This constitutes 20.5% of the present paid up equity capital of Rs 224 m. It is not known who the beneficial owners of these shares are. The foreign corporate bodies hold another 11.6% of the stock.

A highly capital intensive unit

It looks as if this company is also a highly capital intensive unit. The company had a year- end gross block of Rs 10.9 bn against Rs 9.1 bn previously. Juxtapose this with the revenues realised from finished goods - net of excise - of Rs 13.4 bn and Rs 11.1 bn respectively. That would infer a turnover to gross fixed asset ratio of 1.2 against 1.3 previously. Consequently the depreciation provision also weighs some on the company's P&L account. (But it may be noted that the total addition of Rs 1.9 bn to gross block during the year includes R&D expenditure of Rs 454 m. In the preceding year the total addition to gross block was Rs 1.7 bn. Of this sum the R&D expenditure capitalised amounted to Rs 369 m).The total value of capitalised R&D expenditure at present amounts to Rs 1.5 bn. The capital spending on R&D seems to be a relatively recent phenomenon. However, the beneficial spinoff of such spending on R&D is not immediately known.

Cash generation falling short

The other issue is the fact that the cash generated from operations is not enough to feed its needs. It is for one carrying a relatively high inventory baggage. The value of inventory at year end amounted to a very considerable 44% of the revenues drummed up during the year. The vast bulk of the inventories are held in the form of work in progress. This would appear to be a little out of place. Add to this discomfort the fact that the trade receivables at year end amounted to close to 23% of revenues. It did not help one bit that the value of trade payables at year end was far lower than the value of trade receivables. This further skews the picture. This state of affairs could be because quite some of its raw materials consumed are sourced from abroad. It will be difficult to negotiate deferred payments terms for imports. The only creditable aspect here is that the current assets at year end are only marginally more than the current liabilities as on the same date - thus leading to lower working capital interest costs.

Profits under strain

The company sure is making heavy weather on the profitability front as I had stated earlier. While the revenues realised from finished goods accelerated by 23.3%, the consumption cost of materials etc rose by 29.2%. Adding to the difficulties was the 39% increase in finance cost to Rs 1 bn. The point to note here is that the borrowings at year end were substantially higher at Rs 10.4 bn against Rs 8 bn previously. The other major item of expenditure-other expenses-also rose 26.7% to Rs 1.1 bn. The major culprit under this head of account appears to be 'manufacturing expenses' which rose 24% to Rs 702 m. It may be of some interest to note that 'other income including operating income' accounted for 27% of pre-tax profit during the year. The curious feature here is that the 'other income schedule' does not appear to include export incentives-though the 'other current assets schedule' accounts for export incentives accrued of Rs 183 m.

As stated earlier it is spending large sums on gross block addition. The bulk of this addition is going towards the creation of substantially more fixed assets including R&D assets. But for the time being the cash generated from operations is insufficient to fund this expenditure. Hence the company has to borrow extra sums of cash to make up the backlog. Obviously the company has chalked out plans to increase revenues substantially over time. This includes the renewed focus on concentrating sales abroad. How it all pans out will be known sooner than later. There is however not much information forthcoming from the directors' report.

Incorporating siblings

There is also concurrently a feeble effort at incorporating companies abroad as a part of its grand design. There is a company each registered on Mauritius and in England in 2010 and 2011. But for the moment their efforts to generate any business amount to nought. The paid up capitals of these two entities are yet to open their account though the company has advanced Rs 100 m to them for this purpose. But, interestingly, of this advance, Rs 16 m is shown as bad and doubtful and provided for. This is some start in any which direction in my opinion. The caveat one can add here is that if the company does route its exports through these two windows at some stage, then the parent will only be the beneficiary of any dividends as and when the siblings pay any dividend. It also boasts of two other family entities going by the name Nectar Lifestyle and Nectar Organics which are controlled by the management but appear to be independent of the parent.

It is very difficult to take any call on this company from the details available in the latest annual report.

Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

Disclaimer:

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